Painful 2008, and a rude awakening/answer

Well, it's been a painful 2008. I have seen my portfolio dwindle to less than one-third YTD. 

I have stopped blogging for a few months, partly because of the losses, and partly because I am lazy. and busy 

2008 also offers a rude awakening and an answer to my hypothetical question I have often posed to myself. Is my 2007 returns due to skill or luck? 2008 answers "luck". And so, I am the fool. Hopefully, I will emerge smarter.

While I am still surviving and suffering investing pain, I am still investing. In equities. 

Probably I have this belief. 2009 will be a better year for equities. If not, 2010. 

And yes, my portfolio. I have sold Cacalo, C&G and Valutronics. Buys are China Ziano and China Fish ,which may be higher quality businesses than what I have sold. Presently, I am looking to buy a REIT, given the interesting high yield. 

Finally, I have recently read a brillant book. It is "Outliers" by Malcolm Galdwell.

How to be Happier

As an investor, probably you can't help but to feel blue when the market is going down and down. Here, I shall describe a few ways to help an investor feel better.

First, you can try changing your reference point. If you have started investing many years ago, instead of looking at year to date losses, why not look at the total gains since you have started investing?

Next, you can try reviewing or look at your portfolio less frequently, if your portfolio is in loss-making mode now. Each time you look at your losses, you may feel sad. Hence by looking less frequently, you will feel sad less frequently too.

Finally, you can always remind yourself that 'this too will pass'. As stock returns tend to be positive in the long run, sooner or later your portfolio will turn green.

Revisting Randomness

Recently I have been re-reading Nasim Taleb's excellent "Fooled by Randomness". I find a few thoughts surfacing in my mind.

One, Taleb noted that good investing/trading performance can be due to randomness, even if the methodology is unsound. Consider a population of 10,000 unskilled investors who have a 60% chance to under-perform the market. Then at the end of 5 years, we will observe 102 persons out of this group of 10,000 people who have outperformed the market every year. Thinking of this, I wonder if my out-performance prior to 2008 is due to luck or skill. I do not really know.

Two, "Fooled by Randomness" has two analogies whereby both traders, in the analogies, blow up and one of the main causes is that they buy on the dips. This point leads me thinking about Bill Miller. Bill Miller is an investor who is known for buying more of the stock, especially when the stock goes down and Bill Miller still believes in his reasons for investing in the stock still hold. There are also other value investors who buys on the dips too.

If buying on the dips increases the probability of blowing up, won't value investors who buy on the dips subject themselves to higher risks? Of course, one may argue that market prices are not important from value investing and long term/business investing perspective. However, no matter what, value investors are still subject to the risk that their hypothesis is wrong and the possibility that they are unable to get out before their chosen business/stock crash. And buying on the dips may magnify the risk of blowing up. To cut it short, I can only conclude that while the risk of blowing up for value investor is low, the risk is still there.

That's probably why heavy use of leverage may not be advisable for value investors who buy on the dips.

Maybe the advice I can provide to myself is to reduce the risk of blowing up in my chosen investing method, and like what Bill Rempel said, "Traders should execute their chosen methodology. If they don't have one yet, they should find one."

P.S. I ignore the demarcation between trader and investor in this post in the last paragraph.

Hindsight Bias Exemplified

I find Legg Mason Q2 2008 letter very interesting, especially from the hindsight bias perspective.

Bill Miller has noted that many people has stated the obvious (i.e. he should have avoided housing stocks, financial stocks etc and he should have stocked up oil companies) from the events that have passed, but nobody is able to state what is obvious NOW. This implies that most (if not all) people suffers from hindsight bias. We emphasize/over-stress on what should have been.

You may also find the letter interesting too.

2008 Q2 Portfolio Update

Q2 has almost passed. Presently, my portfolio contains:

Sinotech

Fujian Plastics

Sihuan

C&G

Karin

Valutronics

Changtian Cacalo (missed out in the last post)

Transactions made since last update:
Bought: Changtian and C&G

Have added more of Changtian and C&G as both have become cheaper.

Year-to-date, my portfolio returns are negative at around -17.9%, slightly worse than STI (-14.2%).

So far, this year is proving to be quite volatile, with the downside being more pronounced. My portfolio probably will end up on the negative side for year 2008.

Nonetheless, given the present prices, it may be time for me to consider bargain hunting.

2008 mid-Q2 Portfolio Update

Half of Q2 has passed. Presently, my portfolio contains:

Sinotech

Fujian Plastics

Sihuan

C&G

Karin

Valutronics

Changtian

Transactions made since last update:
Sold: China Hongcheng and China Precision
Bought: Changtian and Cacalo

Sold China Precision due to the unexpectedly poor Q1. China Hongcheng was sold due to two reasons. One, my original investment reason was incorrect as I may have overlooked the large amount of debts carried by China Hongcheng. Two, I wish to be less concentrated in chemical fiber industry, since I also have stocks in C&G and Sinotech. Both positions are sold at a loss.

Added more Cacalo shares to my portfolio, due to the unexpected good Q1 results.

Initiate a position on Changtian due to low PE and the interesting prospect of higher revenue & profits for the coming two years. Changtian will be increasing the production capacity of BOPA film and 2-A2MPS, and initiating the production of UV cured PE release film.

Year-to-date, my portfolio returns are negative at around -3.5%, slightly better than STI (-5.9%).

Book Review : Invest Like a Dealmaker

Invest Like a Dealmaker is written by Christopher Mayer, an editor of two investment letter.

The book will be an interesting addition to a value investor library, as it briefly introduces an value investor to other probably more obscure search method.

The book started off by denoting two types of market, stockmarket and the private business market (or Wall Street vs Main Street). Following that, it introduces three concepts on how to think about private business values: that is (i) focus on whole companies, (ii) focus on cashflow and (iii) focus on asset values.

Then it borrows from Marty Whitman's Value Investing the four methods that companies can create value. They are earnings, free cash flow, resource conversion and access to capital markets.

The most interesting part comes next, whereby the author discuss on the eight possible search methods, ranging from Greenblatt's Magic Formula to Distress Investing.

Finally, the book starts to dwell on the philosophy/methods of other great investors such as Rahph Wanger, Bill Miller etc, as well as some academic studies and views of businessman. And also a chapter on when to sell stocks.

Except for the chapter on when to sell stocks, the great investors' philosophy/methods portion may or may not be to your liking, especially if you have already covered a lot of ground in value investing philosophy. Nonetheless, some ideas are quite interesting and may be worth re-reading.

On the whole, the book will be great for aspiring value investors.

2008 Q1 Portfolio Update

As Q1 is almost done, I shall provide an update of my portfolio here. My portfolio currently contains:

Sino-tech Fiber

China Precision Tech

Fujian ZY Plastics

Sihuan

China Hongcheng

Cacola

C&G

Karin

Valutronics

Transactions made since last update:
Bought and Sold: Dutech
Bought: Sihuan, C&G and Cacalo
Partial Sold: Fujian ZY

As seen, my portfolio did not change much since the last update.

Bought Dutech as the price is attractive at around 2007 historical 6.x PER. However, the position is not large, as I am waiting for futher price drops. Dutech was sold later to raise cash for other purchases.

Sold a minor portion of Fujian ZY to raise cash for other positions.

Have added more shares of Sihuan, C&G and Cacalo in the portfolio as the prices of these stocks fallen to attractive levels.

Year-to-date, my portfolio returns are negative at around -15%, more negative than STI (-12%).

Book Review : Investing The Templeton Way

Investing The Templeton Way is authored by Templetion's grand-niece, Lauren and her husband, Scott.

The book would be a splendid addition to a value investor's library. The book elaborates on Templeton's principle of buying at maximum pessimism and his way of thinking in his recent exploits of the market (for example, shorting the Internet stocks in early 2000)

Some interesting points are:

1) The book contains two analogies to explain how buying at maximum pessimism. One is the lemonade example, and the other describes how Templeton's grandfather's bidding strategy for farmland. That is to bid only when there are no bidders for the farmland. In this manner, the purchased farmlands were bought at a very low price and hence, a profit was almost guaranteed when the farmlands were sold some years later.

2) The right question should be "When is the outlook most pessimistic?" and not "When will the outlook be good?"

3) Diversification will be helpful if one is using borrowed money. This was illustrated when Templeton uses borrowed funds to purchase every small caps below $X dollars, so as to profit enormously from his divergent views when compared to the prevalent market view.

4) Always use real data (and not press commentaries) in your decision making process. This is seen when the book describes how Templeton uses comparison of current P/B and P/E against the historical P/B and P/E to derive the conclusion that the market was very cheap in 1979-82.

5) Patience is a necessity. Investing in unwanted stocks requires patience as it may take a few years before the stocks take off.

6) Be flexible. Templeton recognizes that bonds are good buys at Mar 2000 and he bought zero-coupon bonds using borrow money (carry trade) at that time, which further amplifies his returns.

7) What you learn may be transitive. The book has described how Templeton identifies Japan as an investor's paradise before many other fund managers and how Templeton is able to use the same insights to spot Korea as the investor's paradise. Templeton invested in an unit trust holding only Korea equities during 1998 Asian Financial Crisis.

In short, if you are a value investor, you should read the book.

Beating CPF's extra 1% and its regulations

If you do not know, from 1 April 2008, you will not be able to invest the first $20,000 in your Ordinary Account. (See here) This rule is because of the additional 1% government is offering us.

The extra 1% will only push up the net returns to 3.5%, probably half of what one can get in a 20 year MSCI world stock index (assuming it's 7%). It seems that the government is forcing the younger adults with long time horizon to miss out on higher returns in long term investing, rather than letting the young adults to choose themselves (in other words, having an opt-out option for the extra 1% in OA).

And not to mention that the 3.5% return is lower than the current CPI inflation rate.

As the April 2008 falls nearer, I have decided to utilize the bulk of my CPFOA to buy some stocks, especially in the current bargains galore season. The chosen stocks will be those with P/NTA less than 1 and property owning companies (to safeguard against inflation).

Currently, possible candidates so far are Orchard Parade, Singapore Land and Hotel Grand Central.

Hopefully (and likely), in five years time, the return from the above candidates would beat the 3.5% handily.

2008 mid-Q1 Portfolio Update

As half of Q1 has passed, my portfolio now contain:

Sino-tech Fiber

China Precision Tech

Fujian Plastics

Sihuan

China Hongcheng

Cacola

C&G

Karin

Valutronics

Transactions made since last update:
Bought and Sold: Man Wah, Sunshine
Sold: Hongwei, the Two HK stocks
Partial Sold: China Precision
Bought: Sino-Tech Fiber, Sihuan, China Hongcheng, C&G, Karin

Bought Man Wah and Sunshine initially due to the thinking that they may be undervalued. However, worries on US housing lead to sale of Man Wah. The sale of Sunshine is due worries over the huge US$120m loan taken with nothing concrete done.

Sold Hongwei and the two HK stocks primarily to raise cash for other positons. Same for the partial sale of China Precision.

Sino-Tech and Sihuan are bought partially due to the initial recommendations made on Kleer's blog (Extraordinary Profits). However, the main reason for buying Sino-Tech is the large drop in the prices for Sino-Tech, leading to mouth-watering valuations based on its 2007Q3 results. I did not buy as much Sino-Tech as I would in previous cases, since I do not want to be overly concentrated in textiles.

Sihuan was purchased largely based on it being possibly unaffected by US slowdown/recession. Also, on valuation grounds and growth prospective, it seems to be more attractive than other China Pharmaceutical S shares. However, it is bought at a higher PE than my usual purchases.

China Hongcheng, C&G and Karin are bought on valuation grounds.

As seen, my number of positions have increased since the last update. This is mainly for diversification purpose. Overall, Valutronics remained my largest holding.

YTD, my portfolio returns are negative at around -10%, slightly less negative than STI. In previous weeks, it was more negative than STI, implying that my portfolio has been quite volatile so far.

P.S. Please do not blindly imitate my portfolio. My portfolio may change overtime. And I certainly will not provide regular updates to my portfolio.

Book Review: Your Money & Your Brain

Your Money and Your Brain, by Jason Zweig, is one of the latest book on behavioural finance (or neuroeconomics).

Basically, what differentiates this book from other books is that it include brain scans of the author's brain as the author is subjected to various behavioural experiments. And, as each chapter concentrates on a certain behavioural weakness, each chapter also contains tips to combat the behavioural weakness.

Generally, I would think that the book is marvelous, especially since I like to read up on behavioural finance. NLB has the book (332.6019 ZWE).

Some learning points are:
1) We generally have two brains, one thinking brain and one feeling brain. Or in other words, one reflective brain and one reflexive brain. In investing, it is important to have the right mixture between thinking and feeling. Some tips to maintain the right balance are asking another question (looking from other angles), try to disprove (instead of proving), know when feelings will rule, count to ten before acting.

2) We may be greedy because we get satisfaction from anticipating rewards. Sometimes, the joy of anticipation of getting an item is even larger than the joy that comes from having the item. Some tips to overcome our greed are:
- there are no certain things and trees do not grow to the sky.
- One seldom strikes lottery twice.
- Control the frequency of cues. Or simply, avoid looking at stock prices.
- Think twice

3) We like predictions. Unfortunately, we are overconfident in our predictions. Or simply, our predictions suck. Some tips are:
- Control those that can be controlled such as your expectations, your risk, your expenses etc
- Stop predicting. Instead, try to restrict yourselves or your options. For example, one can restrict oneself to dollar-cost-averaging
- Ask for the proof
- Test repeatedly to see if your predictions are more accurate than you think. In other words, if you think you are a good stock picker, you can test it by starting a paper portfolio for a year. And then accept the result of the test.
- Take a break from the markets. And do not obsess over stock prices

4) We are overconfident in our abilities. To overcome this trait, some tips are:
- admit your ignorance. Know that you do not know.
- Have a "Too Hard" category (from Buffett).
- Be conservative in your valuation.
- Keep an investing diary
- Learn what works and what does not.
- Learn from mistakes.
- Be diversified

5) Our risk tolerance is not fixed. It is frame dependent. Seek to reframe your reference point by look outside yourself (look from other angles) and looking at past history.

6) Our fear sometimes may be irrational. That is, we fear the wrong things and our fears are susceptible to recency bias. To overcome the fears, try not thinking the fear by taking a walk or exercising. Or get away from the crowd by seeking an outside opinion.

7) We are susceptible to regrets. In other words, we sometimes choose an alternative, say A, so as to avoid regret over the outcome if we choose other alternatives. Some ways to reduce our regrets are
- Create rules and follow the rules.
- Aid yourself to act. A way is to place post-it notes to remind yourself to act according to your rules.
- Cut your losses, especially if something is wrong with the business.
- Have inertia work for you. Put yourself on auto-pilot plans.
- Examine your portfolio prices infrequently. You cannot regret over what you do not know.

I would recommend you to read the book for more details.

Weekly Portfolio Volatility

In an earlier post, I have highlighted downward volatility exist, even in value investing.

Over the past two years from 2006-2007, I have tried to value my portfolio on a weekly basis based on unit value method.

Based on the 104 weeks (or datapoints) from 2006-2007, my portfolio returns has a standard deviation of 5.2%. More meaningfully, if I have 0% returns, my weekly returns will range from -10.4% to 10.4% in 99 out of 104 weeks.

Thankfully, my portfolio has more positive weeks than negative weeks (or slight negative skewed in statistical terms). Hence, I would suffer less frequent (though still considerable) stress or worries over negative returns and I would have more frequent joy over positive returns.

Going forward into 2008, due to the unfavorable environment, I expect that my portfolio will see probably more negative weeks and more volatile weekly returns.

Distribution of My Weekly Returns

A Perfect Storm

Looking at the STI over the past few trading days, it certainly seems to be a perfect storm with YTD losses of around 8%.

As Buffett has said that "you paid dearly for a cheery concensus", the present gloomy outlook makes me feel intrigued or even slightly excited. It is always wonderful to be able to bargain hunt, waiting for prices to drop lower (at a higher probability than usual). Beats watching the paint dry.

Well, at the end of day, every adversity or losses one endures, one comes out stronger and hopefully wiser.

Book Review: Invest like a Fox, Not like a Hedgehog

Invest like a Fox, Not like a Hedgehog, by Robert C. Carlson, tries to convince its readers that one should be like a fox (multi-facet, multi-perspective) and not like a hedgehog (sole perspective) in investing.

Personally, I feel that this book is pitched for those people who either understand finance theory or have read Peter Berstein's books (Capital Ideas and Capital Ideas Evolving). Even with the background understanding, it may be a struggle to fully understand what the Robert is conveying. This is because the book touches on a wide range of topics which includes CAPM, Modern Portfolio Theory, Valuation Cycle, Behavioural Finance, Complexity and Chaos Theory, Hedge Funds Strategies & Portable Alpha etc. And not to worry, the book sticks to the principle of having no maths equations.

Some ideas that are found in the book:
1) Hedgehog strategy may not work. For example, an all-equity portfolio or 60/40 equity/bond portfolio may fail in certain circumstances, especially if the investors have a short investment horizon. Even those people with long investing horizon (e.g. 20 years) may not get their ideal/required return using all-equity portfolio or 60/40 equity/bond portfolio.

2) Modern Portfolio Theory has useful principles:
Diversification reduces risk.
Investors should pay attention to risk and not only returns.
More attention should be paid to total portolio risk and return, instead of individual assets in the portfolio.

3) Investors may go from optimism to pessimism. This leads to Valuation Cycle (I have not seen this term before), where one goes from Euphoria to Panic and back to Euphoria with a few other stages between Euphoria and Panic.

4) Why indicators (or automatic investoment rules) fail. There are several reasons in the book. I shall point out two. One is due to the chosen data period. For example, a certain investment rule may only work in 1970-1990 and if one stretches the period from 1960-2000, the rule may not be profitable anymore. Second is that the rule may become to overly used once it is well-known. Hence any potential profits found in the rule may have been effectively earned (or arbitraged) by the market players.

5) The foxlike investors, in future, may adopt or incorporate absolute return strategies/funds in their portfolios. This reflect the belief that risk reduction is as crucial as potential returns. Analysis will be based more on the total portfolio characteristics, rather than its underlying components/assets.

The book contains more ideas than what I have briefly describe. If you're interested, you may want to read it from the bookshop or from NLB (332.6 CAR).